2

 MODELS AND THE

PRODUCTION
POSSIBILITY
FRONTIER
WHAT YOU WILL LEARN

 Why are models an important tool in the study of economics?

 What the production possibility frontier model tells us about efficiency,
opportunity cost, and economic growth
 The two sources of economic growth—increases in the availability of resources
and improvements in technology

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MODELS IN ECONOMICS

1) Model: a simplified representation of a

real situation that is used to better
understand real-life situations.
simplified version of reality

2) Other things equal assumption: all other

relevant factors remain unchanged;
ceteris paribus

3) We try to treat economics as close to a

laboratory science as possible—with only
one variable allowed to change at a
time.
TRADEOFFS: THE PRODUCTION POSSIBILITIES FRONTIER
MODEL
The PPF is a model that shows the combinations of two goods that are
possible for a society to produce at when resources are fully employed (i.e.
at full employment).

We can use the PPF model to answer questions like:

• How much can we produce?
• What will it cost us to change our mix of production?
Trade-offs:
The Production Possibility Frontier
Quantity of
Dreamliners
1)Someone makes a trade-off when
they give up something to get The PPF line
something else.
30

2)The production possibility frontier

(PPF)
1)Illustrates the trade-offs facing an 15
A

economy that produces only two B

goods. 9

2)Shows the maximum quantity of one

good that can be produced for any 20 28 40

given production of the other. Quantity of Small Jets

THE PRODUCTION POSSIBILITY FRONTIER

The production possibility frontier shows:

 Efficiency
Good 1
The PPF line
 opportunity cost
30
 economic growth

40
Good 2
 1. EFFICIENCY IN PRODUCTION

➢ The PPF illustrates efficiency.

 An economy is efficient if there are no
missed opportunities
 meaning there is no way to make anyone
better off without making at least one person
worse off.
 An economy is efficient in production if it
produces at a point on its PPF, meaning there
is no waste of resources. c = possible but not
efficient
7
EFFICIENCY IN ALLOCATION: THE PPF
• Efficiency in production is only part of
what’s required for the economy as a
whole to be efficient.
• Efficiency also requires the economy to
allocate its resources so that consumers
are as well off as possible. This is called
being efficient in allocation. 최대의 효율, 그래프를 보고 이
것을 결정할 수는 없다

• It’s unclear whether A or B is more

efficient in allocation without knowing
consumer preferences.
• The optimal point of consumption or
production will be both Productively and
Allocatively Efficient.
Trust me, I’m an economist

C
To summarize …

to be efficient (no way to make anyone better off without making at least
one person worse off), an economy must produce as much of each good as
it can, given the production of other goods (efficiency in production), and it
must also produce the mix of goods that people most want to consume
(efficiency in allocation).
2. OPPORTUNITY COST: what must be given up in order to get a good.
Quantity of
Dreamliners All points under the curve are feasible (but not efficient)…
And all points above the curve are not feasible.
All points on the curve are feasible and efficient in production.
The PPF line D

30 Production Possibilities
20s = 15D
1S =3/4D
Dreamliners Small Jets
8S = 6D
30 0 1S = 3/4D

15 20
A 9 28
15
0 40
B
9
C
Each small jet has an
opportunity cost of
¾ of a Dreamliner.
20 28 40
Quantity of Small Jets
Active learning 100 100C = 200M
C = 2M

200

Suppose you are stranded on an island. Luckily, this island is rich in clams and
mangos. If you devote all of your time to harvesting clams, you can get 100
clams in a week. If you use all of your time to collect mangos, you can find
200 mangos in a week.
Assume it is possible to collect fractional amounts of both goods and draw a
sketch of your production possibility frontier for a week. (Place mangos on
the x-axis and clams on the y-axis.)
Calculate the opportunity cost of each good.
Opportunity cost of mango= ½ clams
Opportunity cost of clam = 2 mangos
ACTIVE LEARNING: PRACTICE

Consider a production possibility frontier for Iraq. If in 2014 Iraq's

resources are not being fully utilized, Iraq will be somewhere _____ of its
production possibility frontier.
a. Underneath (inside)
b. Outside (above)
c. Near the bottom right
d. Near the top left
 Increasing Opportunity Cost
Quantity of both increasing

Dreamliners
Producing the first …requires giving up
35 20 small jets . . . 5 Dreamliners

But producing • Opportunity cost of

You must measure 30
20 more small jets . . . small jets is increasing
the Opportunity A
25 • So is the opportunity
Cost between the
cost of dreamliners.
points – the slope 20
of the tangent …requires giving up
15 25 more Dreamliners…
line.
10

5
PPF

0 10 20 30 40 50
Quantity of small jets
ACTIVE LEARNING: PRACTICE

Suppose the economy is operating

at point C. The opportunity cost of
producing the fourth train would
be:
a. 19 tons of sugar.
b. 45 tons of sugar.
c. 80 tons of sugar.
d. 3 trains.
 3. ECONOMIC GROWTH

 Economic growth allows a sustained rise in aggregate output.

 Economic growth is shown as an outward shift of the PPF.
human capital, physical
capital …

 There are two general sources of economic growth.

 An increase in an economy’s resources (factors of production-resources used to
produce goods and services).
 Progress in technology (the technical means for producing goods and services).
 Allows us to do more with any given amount of resources
 Boeing engineers discovered large advantages to building a whole plane out of
composites (e.g. fiberglass, carbon fiber, and fiber-reinforced matrix systems). The plane
would be lighter, stronger, and have better aerodynamics than a plane built in the 18 of 11
traditional way.
Quantity of
Dreamliners
ECONOMIC GROWTH
The economy can now
35 produce more of everything.
E
inward shift = long lasting enough =>
30 worship, war

A
25

20

15

10

5 Original New
PPF PPF

0 10 20 25 30 40 50 Quantity of small jets

FACTORS OF PRODUCTION: LAND

1. Land includes natural

resources, such as mineral
deposits, oil, natural gas,
water, and actual land
acreage.
FACTORS OF PRODUCTION: LABOR
2. Labor is the economy’s pool of workers.
FACTORS OF PRODUCTION: PHYSICAL CAPITAL

3. Physical capital is
manufactured
items used to
produce other
goods and
services.
FACTORS OF PRODUCTION: HUMAN CAPITAL

4. Human capital is the

educational
achievements and
skills of the labor force
(which increase labor
productivity).
Thank you!